Mergers is the sign of a healthy stock market
AbbVie (NYSE:ABBV) is buying the long-suffering Allergan (NYSE:AGN) for 63 billion bucks. Long-term readers might remember me making a strong case to go long on AGN because of the charts, and then Carl Icahn got involved, so we were able to escape with some money and our dignity intact. AGN went on to be a perennial stinker and served as one of the lessons along the way to convince me that the drug business (especially biotech) was just too difficult to fathom.
We have, however, seen a steady drumbeat of mergers in this space, just last week we saw Pfizer (NYSE:PFE) scoop up Array BioPharma (NASDAQ:ARRY) and a few months before that we saw another huge acquisition of Celgene (NASDAQ:CELG) by Bristol-Myers (NYSE:BMY). My take is to buy the SPDR Biotech ETF, which is equally weighted. In this case, technically, it's a biotech buying a pharmaceutical company, but I believe the general trend will continue to be the Pfizers of the world buying the Arrays. XBI should do nicely. Other sectors that are merging are:
- Chips: With Cypress Semiconductor (NASDAQ:CY) being bought by Infineon (OTCQX:IFNNY), Marvell (NASDAQ:MRVL) selling its WiFi business to NXP Semiconductors (NASDAQ:NXPI), and Nvidia (NASDAQ:NVDA) buying Mellanox (NASDAQ:MLNX), the chip sector will continue to merge because there are just too many of them. The typical way to play the Semis is to go long on the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) which is cap-weighted. If you want to have more of an equal-weighted ETF to capture price movement in the smaller names, check out the iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ:SOXX), they don't allow any component to be more than 8% of the ETF.
- Software: We have IBM (NYSE:IBM) buying Red Hat (NYSE:RHT), Salesforce (NYSE:CRM) buying Tableau (NYSE:DATA), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) buying Looker, even Broadcom (NASDAQ:AVGO) buying Computer Associates (NASDAQ:CA). The ETF to get the most out of the bigger buying the smaller is the equal-weight SPDR Software & Services ETF (NYSEARCA:XSW).
- Oil and the Permian consolidation: The acquisition by Occidental (NYSE:OXY) of Anadarko Petroleum (NYSE:APC), I believe, is going to kick off the rationalization of the Permian region of Texas, and this merger is a great example of that. OXY's CEO predicts billions in savings. I believe that irrespective of where the price of WTI is going, consolidation will accelerate. In this case, let's stick with the cap-weighted SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) since it will be the big integrated oil companies that are going to be doing a lot of the buying, and the bigger E&P names like a Pioneer (NYSE:PXD), EOG Resources (NYSE:EOG), or Diamondback (NASDAQ:FANG) are just as likely to be bought as the small ones, maybe more so.
- Other Sectors like Defense/Aerospace and telecom are trying to merge, but they are already well consolidated. The merger of Raytheon (NYSE:RTN) and United Technologies (NYSE:UTX) makes sense, but as the President stated: "there are so few companies making jets now, I need the competition" (paraphrase). He was right on the theme but way wrong on these two companies as both UTX and RTN don't build fighters. I suspect that even mid-sized mergers in Defense like L3 (NYSE:LLL) and Harris (HRS) which got approved may well be the last. T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) are absolutely the last remaining companies that can consolidate the phone business. As a citizen, I am against this one because it will raise prices, but it will be interesting to see what happens to the piece they are going to have to sell off to DISH Network (NASDAQ:DISH). In these sectors, I like Kratos (NASDAQ:KTOS), AeroVironment (NASDAQ:AVAV) as they are. In telecom, I like CenturyLink (NYSE:CTL) not because anyone will buy it (yet or anytime soon) but because to me, it's the stealth play for 5G.
- The other area might be casinos like we had with Eldorado (NASDAQ:ERI) buying Caesars (NASDAQ:CZR), just yesterday. I am wondering if there will be further consolidation since we have seen insider buying at MGM Resorts (NYSE:MGM), could they be a candidate? Or with the turmoil just being over at Wynn Resorts (NASDAQ:WYNN), they might be a candidate. Overall, I wonder if the whole resort/hotel/casino area might be about to embark on a mating dance or is the ERI/CZR combo a one-off.
We need to adjust
Early Monday, I thought that the IPO names would float up with the overall conviction of the market that the meeting with Trump and Xi will be a success. Instead, the market is flat-lining, and right from the opening bell, all the IPO names and our high-beta names fell harder than the overall market. I want to be real with you all at all times, and this tactic is not working. I still, of course, am excited to see names like Pinterest (NYSE:PINS), Zoom (NASDAQ:ZM) and Slack (NYSE:WORK) coming in.
I am also thrilled to see names like Shopify (NYSE:SHOP) fall because a few lower tier brokers cited them for price. As a counter-argument, we have D.A. Davidson (albeit also a small-ish broker) raising the price target to $400. Pay attention to D.A. Davidson, they are known for their data-driven analysis, so keep an eye on SHOP. In any case, keep an eye on all tech names on our list like ServiceNow (NYSE:NOW), Workday (NASDAQ:WDAY), and even a big name like Salesforce, etc. If any of the high-beta tech names fall to -20%, they are a "pound the table" buy.
The contrarian in me is also happy, because if the market is adjusting to the possibility to a "No Deal" G20, we might come through to the upside with any kind of positive statement from Trump/Xi even if it's just that they agree to keep talking. This is notwithstanding the near bellicose statements coming out of China this morning. Still, I want you to stay at the same cash spend limit of 1/3 of our cash cushion (25% to 35%), that means that if you have a $100K speculation budget and $25K is your cash cushion, then you should only be risking $8.3K on trading this week. I would rather see you "pay" for a new trade by retiring an old one. Again, if you read my Sunday piece: "Markets Climb Walls of Worry. Here's the Wall and what to do," then you know what we are facing in the next few weeks. If you don't want to generate cash, then find other ways to hedge.
I usually pay attention only to individual insiders, but I am seeing a steady flow of purchases of Sunrun (NASDAQ:RUN) for quite a while now. The buyer is a major shareholder - Tiger Global Management. Tiger is run by the legendary Julian Robertson. In any case, once again I see a 3 million purchase in RUN's stock. If you believe in solar energy, which along with wind is surging, then maybe RUN is worth a look. Solar and wind have become competitive and in some cases cheaper than conventional energy sources and states are subsidizing or allowing homeowners to sell back the electricity they generate. It's worth a look.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.